Certifications

December 20, 2012

Fiscal Cliff Notes - Plan B Edition

Tonight's House vote on "Plan B" was not surprising nor was it very important to the final outcome of the fiscal cliff debate. As usual, I recommend a strict investor focus. What would constitute a market-friendly outcome?

Investors who do not have an intense partisan stake want to see the following:

Avoiding the economic consequences of an immediate end to Bush-era tax cuts.

Avoiding dramatic increases in capital gains and dividend taxes.

Taking care of the AMT and the doc fix issues.

Avoiding the immediate impact from ending unemployment insurance and the payroll tax cuts.

Avoiding the immediate effect of the sequestration plan, seeking instead a more gradual series of cuts.

Avoiding a replay of the debt ceiling debate from 2011.

The House "Plan B" vote accomplished only some of these objectives, but mostly would have boosted bargaining power for the GOP. Since the Senate was not going to take it up and Obama had promised to veto it, there was never much question of it becoming law.

Overnight stock futures are down over 1.5%. So why is the market reaction so negative?

Commentary on twitter and TV is almost universally critical -- and also very shallow. The Plan B vote does not represent the actual solution. That is something that will (eventually) emerge from the non-public bargaining.

Tonight's vote is just another step in a process that was always destined for an eleventh-hour resolution. Plan B was hated by nearly every Democrat and also some Republicans.

A plan that can actually pass in Congress will include moderates from both parties -- as it should. Such a plan would tick off every bullet point from my list above. Tonight's vote moves us closer to this solution. It makes it clear that a single-party solution is not the answer.

We need compromise.

This does not mark the end of negotiations. While it changes the relative bargaining strength of some participants, the discussions will continue.